The DOL fiduciary rule and its fallout

Whether the rule survives is the open question. Industry groups have already filed suit, the venue pattern favors the plaintiffs, and the November election will decide the agency that wrote it. None of that changes what a formation shop should do between now and April.

What the rule actually changed

The rule rewrites a 1975 regulation that defined who is an "investment advice fiduciary" under ERISA and parallel Internal Revenue Code provisions. The 1975 test had a five-part gate — advice had to be individualized, regular, a primary basis for a decision, mutually understood as such, and rendered for a fee — and almost no one cleared all five. A broker recommending a rollover could argue that none of their calls were "regular" and that the recommendation was not the "primary basis" for the customer's decision. The 1975 test worked as a practical immunity.

The new rule collapses that gate. Any recommendation to a plan, a plan participant, or an IRA holder about what to do with retirement assets — including the threshold recommendation to roll a 401(k) into an IRA — is fiduciary advice if it is for a fee and directed to a specific person. The "one-time" loophole is gone. The "primary basis" language is gone. Suitability is no longer the ceiling for a broker; the ceiling is best interest.

Best interest comes in through a new prohibited-transaction exemption, the Best Interest Contract Exemption, usually shortened to BIC or BICE. If an advisor or their firm wants to keep earning commissions, 12b-1 fees, or other variable compensation on retirement accounts, they must enter a written contract with the customer that promises adherence to impartial-conduct standards, warrants that the firm has policies to mitigate conflicts, and discloses the compensation. The customer gets a contract right they can sue on. The agency gets a record. Streamlined disclosure is allowed in some cases; level-fee fiduciaries who do nothing but move a customer to a flat-fee account face a lighter, documentation-focused version of the exemption.

There is also a carve-out for education (general information about retirement planning is not advice), for platform providers (offering a menu is not advice), and for hire-me conversations (the pitch itself isn't advice). The carve-outs are narrower than they look. Naming specific investments in what a marketer would call education is usually enough to lose the exception.

Who in the formation world should care

The rule was written with wirehouses and broker-dealers in view, but its reach is wider than that, because ERISA fiduciary status follows the recommendation rather than the title of the person making it.

Self-directed IRA LLCs and checkbook-control structures. The standard product here is a single-member LLC owned by a self-directed IRA, capitalized by a rollover, and managed by the account holder so the account holder can write checks for real estate, private loans, or cryptocurrency. Promoters routinely sit between the custodian, the formation agent, and the client. A promoter who tells a prospect to move a 401(k) into a self-directed IRA and then into an LLC is making two rollover recommendations, at least one of which is squarely within the rule. Charging a setup fee, a recurring custodian fee shared with the custodian, or a referral rebate turns that recommendation into fiduciary advice for compensation. The BIC exemption is available in principle, but its impartial-conduct standard sits awkwardly next to a business model that earns more when the IRA does more transactions.

ROBS arrangements. A rollover-as-business-startup structure has the client roll a 401(k) or IRA into a new C-corporation's retirement plan, which then buys the company's stock, funding the business. The IRS treats the structure as technically permissible but operationally fragile; ERISA treats the rollover advice like any other. Promoters who advertise ROBS as "your retirement money, tax-free, into your business" are making the prototypical recommendation the rule was written to reach. A BIC contract between the promoter and the participant is possible; most ROBS shops are not built to produce one.

Captive-insurance promoters. Where a captive is pitched as a place to park rollover money, the recommendation is in scope. Where it is pitched to a C-corp with no retirement-plan nexus, it is not. The distinction matters, because captive marketers often pitch both in the same meeting.

CPAs and attorneys who recommend rollovers. The rule reaches advice, not licenses. A CPA who tells a client to roll a 401(k) into an IRA at a named custodian and charges anything for the planning conversation — even bundled into a wealth-management retainer — is a fiduciary for that recommendation. Firms that had treated rollover conversations as incidental will need either a documented best-interest process or a clean carve-out ("we do not recommend; here is a list of custodians") that is actually followed in practice.

Registered agents and formation mills. The rule does not reach the clerical act of forming an LLC. It reaches the person who told the customer to form one. If your only role is filing the certificate, you are fine. If your intake script includes the phrase "you should move your IRA into this," you are not.

What the second-order effects look like

Expect three adjustments over the next year.

The first is repricing. Commission-driven self-directed IRA and ROBS shops will either move to level fees, move to a BIC contract their insurance carrier can stomach, or stop recommending rollovers on the record. The insurance answer will drive a lot of the behavior; fiduciary E&O for BIC exposure is being underwritten for the first time and the carriers are being careful.

The second is a pull toward institutional custodians and away from promoter-aligned ones. A plan participant who has signed a best-interest contract will have a paper trail that disfavors exotic allocations into unregistered private investments held inside an LLC. Some self-directed custodians will respond by building advice capabilities; others will retreat to a pure administrative posture and let outside RIAs do the recommending.

The third is a documentation layer that did not previously exist. Expect rollover-recommendation worksheets, cost comparisons between the old 401(k) and the proposed IRA, and written statements of why the rollover is in the client's interest. These will start as compliance artifacts and settle into a standard part of any file that touches retirement money.

What is not yet clear

A coalition led by SIFMA, with the American Council of Life Insurers and the U.S. Chamber of Commerce, filed a consolidated challenge in the Northern District of Texas in June. The theory is a mix of APA overreach, First Amendment commercial-speech arguments, and a claim that the private right of action created by the BIC exemption exceeds the Department's authority. A separate challenge from the fixed indexed annuity industry is pending in the same district. The Kansas district-court challenge by Market Synergy Group has already produced a preliminary-injunction denial, which is a straw in the wind but not the main event. Venue skews conservative; any appeal runs to the Fifth Circuit. None of this is resolved on the merits as of early September.

The political variable is the larger one. The rule is a regulation, not a statute, and the next administration can direct the Department to delay, rewrite, or decline to enforce it. A delay at the April 2017 applicability date would not require new notice-and-comment if framed as an extension; a rescission would. The industry is planning for compliance and lobbying against it in parallel, which is the correct posture when both outcomes are live.

For a formation shop with any retirement-money exposure, the work to do before winter is unglamorous. Identify every product and intake path that touches a rollover. Decide whether you are recommending or merely executing, and make the record match the decision. If you are recommending, price the BIC contract and the insurance to back it. If the numbers do not work, the product was probably not going to survive the next eighteen months anyway.